FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1999
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OR
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from _________________ to _________________________
Commission file number 0-18298
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Unitrin, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-4255452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One East Wacker Drive, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
(312)661-4600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- _______
72,342,774 shares of common stock, $0.10 par value, were outstanding as of
September 30, 1999.
UNITRIN, INC.
INDEX
Page
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PART I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of 1
Income for the Nine and Three Months Ended
September 30, 1999 and 1998 (Unaudited).
Condensed Consolidated Balance Sheets as of 2
September 30, 1999 (Unaudited) and
December 31, 1998.
Condensed Consolidated Statements of Cash 3
Flows for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited).
Notes to the Condensed Consolidated 4-8
Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of 9-13
Results of Operations and Financial Condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
PART II. Other Information.
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Nine Months Ended Three Months Ended
--------------------------------- -----------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
--------------- -------------- -------------- ----------------
Revenues:
Premiums $1,012.8 $ 896.5 $360.6 $ 313.5
Consumer Finance Revenues 91.1 84.8 31.9 28.4
Net Investment Income 151.1 135.3 50.6 48.3
Net Gains on Sales of Investments 94.0 554.6 54.6 488.1
--------------- -------------- ------------- ----------------
Total Revenues 1,349.0 1,671.2 497.7 878.3
--------------- -------------- ------------- ----------------
Expenses:
Insurance Claims and Policyholders' Benefits 671.7 580.7 243.6 202.1
Insurance Expenses 420.6 374.6 144.6 134.8
Consumer Finance Expenses 74.1 71.1 25.4 24.2
Interest and Other Expenses 11.0 9.0 3.9 3.4
--------------- -------------- ------------- ----------------
Total Expenses 1,177.4 1,035.4 417.5 364.5
--------------- -------------- ------------- ----------------
Income before Income Taxes and Equity
in Net Income of Investees 171.6 635.8 80.2 513.8
Income Tax Expense 58.6 221.5 27.6 180.1
--------------- -------------- ------------- ----------------
Income before Equity in Net Income of Investees 113.0 414.3 52.6 333.7
Equity in Net Income of Investees 27.4 49.8 (0.9) 18.2
--------------- -------------- ------------- ----------------
Net Income $ 140.4 $ 464.1 $ 51.7 $ 351.9
=============== ============== ============= ================
Net Income Per Share $ 1.92 $ 5.96 $ 0.71 $ 4.36
=============== ============== ============= ================
Net Income Per Share Assuming Dilution $ 1.91 $ 5.92 $ 0.71 $ 4.34
=============== ============== ============= ================
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
1
UNITRIN, INC. AND SUBSUDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 1999 - $2,657.2; 1998 - $2,492.5) $ 2,623.4 $ 2,557.3
Equity Securities at Fair Value
(Cost: 1999 - $495.9; 1998 - $831.2) 697.9 786.3
Investees at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 1999 - $1,003.6; 1998 - $1,223.2) 617.8 581.2
Other 357.8 379.4
-------------- --------------
Total Investments 4,296.9 4,304.2
-------------- --------------
Cash 13.2 8.6
Consumer Finance Receivables 577.3 532.0
Other Receivables 360.6 290.8
Deferred Policy Acquisition Costs 328.0 332.0
Other Assets 522.9 442.3
-------------- --------------
Total Assets $ 6,098.9 $ 5,909.9
============== ==============
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $ 2,087.7 $ 2,079.0
Property and Casualty 523.7 447.7
-------------- --------------
Total Insurance Reserves 2,611.4 2,526.7
-------------- --------------
Investment Certificates 591.6 544.6
Unearned Premiums 348.0 263.2
Accrued and Deferred Income Taxes 342.7 378.8
Notes Payable 78.9 116.2
Accrued Expenses and Other Liabilities 273.1 258.0
-------------- --------------
Total Liabilities 4,245.7 4,087.5
-------------- --------------
Shareholders' Equity
Common Stock, $0.10 par value, 100 million Shares Authorized;
72,342,774 and 75,977,750 Shares Issued and Outstanding at
September 30, 1999 and December 31, 1998 7.2 7.6
Paid-in Capital 429.7 428.2
Retained Earnings 1,309.6 1,373.4
Accumulated Other Comprehensive Income 106.7 13.2
-------------- --------------
Total Shareholders' Equity 1,853.2 1,822.4
-------------- --------------
Total Liabilities and Shareholders' Equity $ 6,098.9 $ 5,909.9
============== ==============
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
2
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Nine Months Ended
--------------------------------
Sept. 30, Sept. 30,
1999 1998
----------- ----------
Operating Activities:
Net Income $ 140.4 $ 464.1
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Change in Deferred Policy Acquisition Costs 4.7 9.1
Equity in Net Income of Investees before Taxes (41.7) (76.2)
Cash Dividends from Investee 1.1 1.1
Amortization of Investments 17.4 17.5
(Increase) Decrease in Receivables 5.9 16.5
Increase (Decrease) in Insurance Reserves and Unearned Premiums 23.0 1.1
Increase (Decrease) in Accrued and Deferred Income Taxes (84.5) 205.3
Increase (Decrease) in Accrued Expenses and Other Liabilities (6.2) (6.5)
Net Gains on Sales of Investments (94.0) (554.6)
Provision for Loan Losses 17.8 16.7
Other, Net 21.8 16.0
----------- ----------
Net Cash Provided by Operating Activities 5.7 110.1
----------- ----------
Investing Activities:
Sales and Maturities of Fixed Maturities 256.3 498.5
Purchases of Fixed Maturities (351.8) (464.7)
Sales and Redemptions of Equity Securities 431.9 90.8
Purchases of Equity Securities (2.4) (17.9)
Acquisition of Business, Net of Cash Acquired (103.4) (98.5)
Change in Consumer Finance Receivables (63.0) 4.2
Change in Short-term Investments 40.0 13.7
Other, Net (22.1) (17.6)
----------- ----------
Net Cash Provided by Investing Activities 185.5 8.5
----------- ----------
Financing Activities:
Change in Investment Certificates 47.0 (36.6)
Change in Universal Life and Annuity Contracts 6.7 7.7
Notes Payable Proceeds 280.3 367.9
Notes Payable Payments (319.0) (263.9)
Cash Dividends Paid (76.6) (75.1)
Common Stock Repurchases (129.9) (115.4)
Other, Net 4.9 (7.1)
----------- ----------
Net Cash Used by Financing Activities (186.6) (122.5)
----------- ----------
Increase (Decrease) in Cash 4.6 (3.9)
Cash, Beginning of Year 8.6 14.5
----------- ----------
Cash, End of Period $ 13.2 $ 10.6
=========== ==========
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
3
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The unaudited Condensed Consolidated Financial Statements included herein have
been prepared by Unitrin, Inc. ("Unitrin" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission but do not
include all information and footnotes required by generally accepted accounting
principles. In the opinion of the Company's management, the Condensed
Consolidated Financial Statements reflect all adjustments necessary for a fair
presentation. The preparation of interim financial statements relies heavily on
estimates. This factor and certain other factors, such as the seasonal nature of
some portions of the insurance business, as well as market conditions, call for
caution in drawing specific conclusions from interim results. The accompanying
Condensed Consolidated Financial Statements should be read in conjunction with
the Consolidated Financial Statements and related notes included in the
Company's Annual Report on Form 10-K, as amended, filed with the Commission for
the year ended December 31, 1998.
On February 12, 1999, the Company's Board of Directors authorized a 2-for-1
stock split payable on March 26, 1999 in the form of a dividend distribution of
one share of common stock for each share of common stock outstanding on March 5,
1999, the record date for the dividend. Accordingly, prior year share and per
share amounts have been restated retroactively as if the distribution had
occurred prior to the periods presented.
Note 2 -Accounting Changes
Effective January 1, 1999, the Company prospectively adopted Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires the Company to
capitalize qualifying computer software costs incurred during the application
development stage. During the first nine months of 1999, the Company capitalized
$7.4 million of qualifying computer software costs.
In the second quarter of 1999, the Company revised the management reporting of
its segment results to no longer include dividend income received from its
investment in Baker Hughes Incorporated ("Baker Hughes") in the Company's
operating segments. The Company considers the management of its investment in
Baker Hughes to be a corporate responsibility rather than an operating segment
responsibility. Prior period amounts have been reclassified to conform to the
revised reporting. This change had no effect on Net Income.
Note 3 - Acquisition of Businesses
On June 17, 1999, Trinity Universal Insurance Company, a subsidiary of the
Company, completed the acquisition of Valley Group, Inc. ("Valley Group"),
including its principal subsidiaries (Valley Insurance Company, Charter
Indemnity Company and White Mountains Insurance Company) in a cash transaction
for a total purchase price of $ 138.4 million, including related transaction
costs. For the year ended December 31, 1998, Valley Group had consolidated
annual premium revenues of approximately $160 million. The acquisition has been
accounted for by the purchase method and, accordingly, Valley Group's operations
are included in the Company's financial statements from the date of acquisition.
4
Note 3 - Acquisition of Businesses (Continued)
Based on the Company's preliminary allocation of the purchase price, assets
acquired and liabilities assumed in connection with the acquisition of Valley
Group were:
(Dollars in Millions)
- ------------------------------------------------
Investments $ 98.8
Cash 35.0
Other Receivables 75.7
Insurance In Force Acquired 14.4
Accrued and Deferred Income Taxes 5.8
Cost in Excess of Net Assets Acquired 93.2
Other Assets 8.4
Insurance Reserves (94.7)
Unearned Premiums (83.2)
Notes Payable (1.5)
Accrued Expenses and Other Liabilities (13.5)
----------
Total Purchase Price $ 138.4
==========
On September 30, 1998, United Insurance Company of America, a subsidiary of the
Company, completed the acquisition of NationalCare Insurance Company
("NationalCare") and its wholly-owned subsidiary, Reserve National Insurance
Company ("Reserve National"), in a cash transaction for $98.5 million. The
acquisition has been accounted for by the purchase method and, accordingly,
NationalCare and Reserve National's operations are included in the Company's
financial statements from the date of acquisition. In the third quarter of 1999,
the Company completed the allocation of the purchase price to the assets
acquired and liabilities assumed.
On May 29, 1998, the Company completed the acquisition of The Reliable Life
Insurance Company ("Reliable") whereby the Company acquired all of the then
outstanding shares of Reliable common stock in exchange for approximately 3.8
million shares of Unitrin common stock and cash for a total purchase price of
$198.4 million. The acquisition has been accounted for by the purchase method
and, accordingly, the operations of Reliable are included in the Company's
financial statements from the date of acquisition. In the second quarter of
1999, the Company completed the allocation of the purchase price to the assets
acquired and liabilities assumed.
Based on the Company's final allocations of the purchase prices, assets acquired
and liabilities assumed in connection with the acquisitions of Reliable and
Reserve National were:
Reserve
(Dollars in Millions) National Reliable
- ------------------------------------------------ ------------ --------
Investments $ 127.5 $ 537.8
Cash - 1.2
Other Receivables 2.7 14.7
Insurance In Force Acquired 4.5 78.0
Cost in Excess of Net Assets Acquired 17.6 32.3
Other Assets 6.9 34.7
Insurance Reserves (34.0) (425.0)
Unearned Premiums (19.7) (1.7)
Accrued and Deferred Income Taxes (2.6) (26.4)
Notes Payable - (10.8)
Accrued Expenses and Other Liabilities (4.4) (36.4)
------------ --------
Total Purchase Price $ 98.5 $ 198.4
============ ========
5
Note 4 - Net Income Per Share
Net Income Per Share and Net Income Per Share Assuming Dilution determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" for the nine and three months ended September 30, 1999 and
1998 was as follows:
Nine Months Ended Three Months Ended
--------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars and Shares in Millions, Except Per Share Amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- --------- --------- --------- ---------
Net Income $ 140.4 $ 464.1 $ 51.7 $ 351.9
Dilutive Effect on Net Income from
Investees' Equivalent Shares (0.4) (1.0) - (0.3)
--------- --------- --------- ---------
Net Income Assuming Dilution $ 140.0 $ 463.1 $ 51.7 $ 351.6
========= ========= ========= =========
Weighted Average Common Shares Outstanding 73.1 77.9 72.4 80.7
Dilutive Effect of Unitrin Stock Option Plans 0.3 0.3 0.4 0.2
--------- --------- --------- ---------
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 73.4 78.2 72.8 80.9
========= ========= ========= =========
Net Income Per Share $ 1.92 $ 5.96 $ 0.71 $ 4.36
========= ========= ========= =========
Net Income Per Share Assuming Dilution $ 1.91 $ 5.92 $ 0.71 $ 4.34
========= ========= ========= =========
Note 5 - Investment in Investees
Unitrin accounts for its Investments in Investees (Curtiss-Wright Corporation
("Curtiss-Wright"), Litton Industries, Inc. ("Litton") and UNOVA, Inc.
("UNOVA")) under the equity method of accounting using the most recent publicly-
available financial reports and other publicly-available information. Based on
the most recently available public information, Unitrin's voting percentage in
Litton common stock at September 30, 1999 was approximately 27.8% and
Unitrin's investment in Litton exceeded 10% of Unitrin's Shareholders'
Equity. The amounts included in Unitrin's financial statements for Litton
represent amounts reported by Litton for periods ending two months earlier.
Accordingly, amounts included in these financial statements represent the
amounts reported by Litton for the nine and three month periods ended July 31,
1999 and 1998. Summarized financial information reported by Litton for such
periods was:
Nine Months Ended Three Months Ended
--------------------- --------------------
July 31, July 31, July 31, July 31,
(Dollars in Millions) 1999 1998 1999 1998
- ----------------------------- --------- --------- --------- ---------
Revenues $ 3,620.0 $ 3,360.9 $ 1,233.6 $ 1,244.0
========= ========= ========= =========
Cost of Sales $ 2,829.3 $ 2,590.5 $ 977.3 $ 964.1
========= ========= ========= =========
Income (Loss) from Continuing Operations $ 73.4 $ 137.9 $ (21.5) $ 50.5
========= ========= ========= =========
Net Income (Loss) $ 73.4 $ 137.9 $ (21.5) $ 50.5
========= ========= ========= =========
Equity in Net Income of Investees was income of $27.4 million and a loss of $0.9
million for the nine and three months ended September 30, 1999, respectively,
compared to income of $49.8 million and income of $18.2 million for the nine and
three months ended September 30, 1998, respectively. Equity in Net Income of
Investees for the nine and three months ended September 30, 1999 included a loss
of $13.9 million resulting from Unitrin's proportionate share of Litton's
charges related to costs to exit its mainframe outsourcing and professional
services businesses, the consolidation of certain manufacturing facilities and
the effect of its voluntary settlement agreement with the United States
Attorney's office relating to foreign sales consultants. Equity in Net Income of
Investees for the nine months ended September 30, 1999 included income of $3.4
million resulting from Unitrin's proportionate share of UNOVA's gain on sale of
its headquarters building.
6
In August 1998, the Company exchanged its investment in Western Atlas Inc.
("Western Atlas") for common stock in Baker Hughes upon the acquisition of
Western Atlas by Baker Hughes in a merger transaction. As a result of the
merger, Unitrin owns less than 20% of Baker Hughes and the equity method is no
longer applicable. Equity in Net Income of Investees for the nine and three
months ended September 30, 1998 included income of $15.3 million and $5.4
million, respectively, resulting from the Company's investment in Western Atlas.
On August 5, 1999, Curtiss-Wright announced its net third quarter 1999 earnings
will be increased by a $7.2 million "settlement of litigation against an
insurance carrier to recover environmental remediation costs." Unitrin accounts
for its investment in Curtiss-Wright on a three-month-delay basis. Accordingly,
in the fourth quarter of 1999, Unitrin will reflect a one-time after-tax gain
totaling $2.0 million, or approximately $0.03 per common share, related to
Unitrin's proportionate share of Curtiss-Wright's announced settlement.
Note 6 - Income Taxes
On September 27, 1999, Fireside Securities Corporation ("Fireside"), a
subsidiary of Unitrin, received Notices of Proposed Adjustment to its California
franchise tax returns from the State of California Franchise Tax Board (the
"FTB") in the amount of $7.5 million for 1992 and $8.3 million for 1993,
excluding interest. The FTB is asserting that Fireside and Unitrin and its
insurance company subsidiaries are members of a single unitary group. The FTB's
assertion has the effect of taxing the intercompany dividends from the insurance
company subsidiaries to Unitrin, but excluding the apportionment factors of the
insurance company subsidiaries in determining the income taxable in California.
The Company believes that it has a number of meritorious defenses to the FTB's
assertion and intends to vigorously contest the proposed adjustments. However,
the ultimate outcome of this matter cannot presently be predicted with
certainty. Accordingly, the assessments did not have an impact on the results of
operation for the current period.
Note 7 - Other Comprehensive Income
Other Comprehensive Income related to the Company's Investments for the nine and
three months ended September 30, 1999 and 1998 was:
Nine Months Ended Three Months Ended
--------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 1999 1998 1999 1998
- ----------------------------------------------------------------- --------- --------- --------- ---------
Increase (Decrease) in Unrealized Gains, Net of
Reclassification Adjustment for Gains Included in Net Income $ 148.3 $ (0.8) $ (173.7) $ 54.8
Other Increase (Decrease) (4.0) - (2.0) -
Effect of Income Taxes (50.8) (0.3) 61.8 (19.3)
--------- --------- --------- ---------
Increase (Decrease) in Accumulated Other Comprehensive Income $ 93.5 $ (1.1) $ (113.9) $ 35.5
========= ========= ========= =========
The Company's Investments in Investees are accounted for under the equity method
of accounting and, accordingly, changes in the fair value of the Company's
Investments in Investees are excluded from the determination of Total
Comprehensive Income and Other Comprehensive Income under SFAS No. 130. Total
Comprehensive Income for the nine months ended September 30, 1999 and 1998 was
income of $233.9 million and income of $463.0 million, respectively. Total
Comprehensive Income (Loss) for the three months ended September 30, 1999 and
1998 was a loss of $62.2 million and income of $387.4 million, respectively.
7
Note 8 - Business Segments
Segment Revenues and Operating Profit for the nine and three months ended
September 30, 1999 and 1998 were:
Nine Months Ended Three Months Ended
----------------------------------- -------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 1999 1998 1999 1998
- ---------------------------------------------------- --------------- --------------- ------------- -------------
Revenues:
Property and Casualty Insurance:
Premiums $ 479.3 $ 495.4 $ 182.5 $ 158.7
Net Investment Income 34.4 33.0 12.0 10.9
--------------- --------------- ------------- -------------
Total Property and Casualty Insurance 513.7 528.4 194.5 169.6
--------------- --------------- ------------- -------------
Life and Health Insurance:
Premiums 533.5 401.1 178.1 154.8
Net Investment Income 122.4 103.3 40.9 38.4
--------------- --------------- ------------- -------------
Total Life and Health Insurance 655.9 504.4 219.0 193.2
--------------- --------------- ------------- -------------
Consumer Finance 91.1 84.8 31.9 28.4
--------------- --------------- ------------- -------------
Total Segment Revenues 1,260.7 1,117.6 445.4 391.2
--------------- --------------- ------------- -------------
Net Gains on Sales of Investments 94.0 554.6 54.6 488.1
Other (5.7) (1.0) (2.3) (1.0)
--------------- --------------- ------------- -------------
Total Revenues $ 1,349.0 $ 1,671.2 $ 497.7 $ 878.3
=============== =============== ============= =============
Income before Income Taxes and
Equity in Net Income of Investees:
Property and Casualty Insurance $ 13.5 $ 26.1 $ (0.1) $ 3.3
Life and Health Insurance 60.2 43.6 25.0 20.2
Consumer Finance 17.0 15.5 6.4 4.5
--------------- --------------- ------------- -------------
Total Segment Operating Profit 90.7 85.2 31.3 28.0
--------------- --------------- ------------- -------------
Net Gains on Sales of Investments 94.0 554.6 54.6 488.1
Other Expense, Net (13.1) (4.0) (5.7) (2.3)
--------------- --------------- ------------- -------------
Income before Income Taxes and
Equity in Net Income of Investees $ 171.6 $ 635.8 $ 80.2 $ 513.8
=============== =============== ============= =============
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Property and Casualty Insurance
Nine Months Ended Three Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 1999 1998 1999 1998
- ------------------------------------ --------- --------- --------- ---------
Premiums $ 479.3 $ 495.4 $ 182.5 $ 158.7
Net Investment Income 34.4 33.0 12.0 10.9
--------- --------- --------- ---------
Total Revenues $ 513.7 $ 528.4 $ 194.5 $ 169.6
========= ========= ========= =========
Operating Profit (Loss) $ 13.5 $ 26.1 $ (0.1) $ 3.3
========= ========= ========= =========
Premiums in the Property and Casualty Insurance segment decreased by $16.1
million for the nine months ended September 30, 1999, compared to the same
period in 1998, due primarily to lower premium volume, partially offset by $47.4
million of premiums resulting from the acquisition of Valley Group - See Note 3
Acquisition of Businesses. Premiums in the Property and Casualty Insurance
segment increased $23.8 million for the three months ended September 30, 1999,
compared to the same period in 1998, due primarily to $41.1 million of premiums
resulting from the acquisition of Valley Group, partially offset by lower
premium volume. Operating Profit in the Property and Casualty Insurance segment
decreased by $12.6 million for the nine months ended September 30, 1999,
compared to the same period in 1998, due primarily to the effects of the lower
premium, higher severity of losses and storm damage, partially offset by lower
expense related to Year 2000 remediation projects. Operating Profit in the
Property and Casualty Insurance segment decreased by $3.4 million for the three
months ended September 30, 1999, compared to the same period in 1998, due
primarily to the effects of the lower premium, higher severity of losses and the
acquisition of the Valley Group, partially offset by lower storm damage.
Life and Health Insurance
Nine Months Ended Three Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 1999 1998 1999 1998
- ------------------------------------ --------- --------- --------- ---------
Premiums:
Life $ 312.7 $ 273.3 $ 106.2 $ 104.2
Accident and Health 159.7 79.5 52.0 27.4
Property 61.1 48.3 19.9 23.2
--------- --------- --------- ---------
Total Premiums 533.5 401.1 178.1 154.8
Net Investment Income 122.4 103.3 40.9 38.4
--------- --------- --------- ---------
Total Revenues $ 655.9 $ 504.4 $ 219.0 $ 193.2
========= ========= ========= =========
Operating Profit $ 60.2 $ 43.6 $ 25.0 $ 20.2
========= ========= ========= =========
Premiums in the Life and Health Insurance segment increased by $132.4 million
for the nine months ended September 30, 1999, compared to the same period in
1998, due primarily to premiums resulting from the June 1998 acquisition of
Reliable and the September 1998 acquisition of Reserve National and its parent
NationalCare - See Note 3 Acquisition of Businesses. Premiums in the Life and
Health Insurance segment increased by $23.3 million for the three months ended
September 30, 1999, compared to the same period in 1998, due primarily to
premiums resulting from the acquisition of Reserve National. Operating Profit in
the Life and Health Insurance segment increased by $16.6 million for the nine
months ended September 30, 1999, compared to the same period in 1998, due
primarily to the acquisitions of Reliable Life and Reserve National. Operating
Profit in the Life and Health Insurance segment increased by $4.8 million for
the three months ended September 30, 1999, compared to the same period in 1998,
due primarily to the acquisition of Reserve National and lower expenses as a
percentage of premium.
9
Life and Health Insurance (continued)
On October 7, 1999, the Company announced that it has entered into an agreement
with Ceres Group, Inc. for the sale of the Company's subsidiary, The Pyramid
Life Insurance Company ("Pyramid"), to Ceres Group, Inc. for $67.5 million cash,
subject to an adjustment for a dividend to be paid by Pyramid immediately prior
to closing. The transaction is subject to regulatory approvals and the
satisfaction of other customary closing conditions and is expected to close late
this year or early in 2000. Pyramid specializes in the sale of health insurance
products, including Medicare Supplement, targeted at the senior market. Pyramid
had premium revenues of approximately $62 million for the year ended December
31, 1998 and $46 million for the nine months ended September 30, 1999.
Consumer Finance
Nine Months Ended Three Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 1999 1998 1999 1998
- ------------------------------------ --------- --------- --------- ---------
Revenues $ 91.1 $ 84.8 $ 31.9 $ 28.4
========= ========= ========= =========
Operating Profit $ 17.0 $ 15.5 $ 6.4 $ 4.5
========= ========= ========= =========
Revenues in the Consumer Finance segment increased by $6.3 million and $3.5
million for the nine and three months ended September 30, 1999, respectively,
compared to the same periods in 1998, as a result of a higher level of loans
outstanding. Operating Profit in the Consumer Finance segment increased by $1.5
million and $1.9 million for the nine and three months ended September 30, 1999,
compared to the same periods in 1998, due primarily to the higher level of loans
outstanding.
Net Gains on Sales of Investments
Net Gains on Sales of Investments were $94.0 million and $54.6 million,
respectively, for the nine and three months ended September 30, 1999, compared
to $554.6 million and $488.1 million, respectively, for the same periods in
1998. Net Gains on Sales of Investments for the nine and three months ended
September 30, 1999 included pre-tax gains of $93.7 million and $53.6 million,
respectively, resulting from sales of a portion of the Company's investment in
Baker Hughes common stock. Net Gains on Sales of Investments for the nine and
three months ended September 30, 1998 includes an accounting gain of $487.4
million as a result of the Company's exchange of its investment in Western Atlas
for common stock in Baker Hughes upon the acquisition of Western Atlas by Baker
Hughes in a merger transaction - See Note 5 Investment in Investees. Net Gains
on Sales of Investments for the nine months ended September 30, 1998 also
includes gains primarily resulting from the redemption of the Company's
investment in Navistar International Corporation $6.00 Cumulative Convertible
Preferred Stock, Series G and the disposition of the Company's investment in ITT
Corporation common stock. The Company cannot anticipate when or if similar
investment gains or losses may occur in the future.
Equity in Net Income of Investees
Equity in Net Income of Investees was income of $27.4 million and a loss of $0.9
million for the nine and three months ended September 30, 1999, respectively,
compared to income of $49.8 million and income of $18.2 million for the nine and
three months ended September 30, 1998, respectively. Equity in Net Income of
Investees for the nine and three months ended September 30, 1999 included a loss
of $13.9 million resulting from Unitrin's proportionate share of Litton's
charges related to costs to exit its mainframe outsourcing and professional
services businesses, the consolidation of certain manufacturing facilities and
the effect of its voluntary settlement agreement with the United States
Attorney's office relating to foreign sales consultants. Equity in Net Income of
Investees for the nine months ended September 30, 1999 included income of $3.4
million resulting from Unitrin's proportionate share of UNOVA's gain on sale of
its headquarters building. In August 1998, the Company exchanged its investment
in Western Atlas for common stock in Baker Hughes upon the acquisition of
Western Atlas by Baker Hughes in a merger transaction. As a result of the
merger, Unitrin owns less than 20% of Baker Hughes and the equity method is no
longer applicable. Equity in Net Income of Investees for the nine and three
months ended September 30, 1998 included income of $15.3 million and $5.4
million, respectively, resulting from the Company's investment in Western Atlas.
On August 5, 1999, Curtiss-Wright announced its net third quarter 1999 earnings
will be increased by a $7.2 million "settlement of litigation against an
insurance carrier to recover environmental remediation costs." Unitrin accounts
for its investment in Curtiss-Wright on a three-month-delay basis. Accordingly,
in the fourth quarter of 1999, Unitrin will reflect a one-time after-tax gain
totaling $2.0 million, or approximately $0.03 per common share, related to
Unitrin's proportionate share of Curtiss-Wright's announced settlement.
10
Other Items
Other Expense, Net increased by $9.0 million and $3.4 million for the nine and
three months ended September 30, 1999, respectively, compared to same periods in
1998, due primarily to higher net corporate interest expense and other
unallocated expenses.
During the first nine months of 1999, the Company repurchased 3,821,680 shares
of its common stock (adjusted for the Company's 2-for-1 stock split) in open
market transactions at an aggregate cost of $129.9 million. The repurchases were
made with general corporate funds. At September 30, 1999, the Company had
approximately 5.9 million shares remaining under the existing repurchase
authorization.
At September 30, 1999, the unused commitment under the Company's revolving
credit facility was $267 million. In addition, for the remainder of 1999, the
Company's subsidiaries would be able to pay approximately $641 million in
dividends to the Company without prior regulatory approval.
Year 2000
The Year 2000 issue (i.e. the ability of computer systems to accurately identify
and process dates beginning with the year 2000 and beyond) affects virtually all
companies and organizations. When the Company began to formalize its Year 2000
readiness program several years ago, most of the Company's computer systems were
already Year 2000 compliant. However, certain of the Company's computer systems
used only two digits to identify a year in a date field. For example, the year
2000 would be represented in these systems as "00," but in many cases might have
been interpreted by the computer as "1900" rather than "2000," thereby
potentially resulting in processing errors.
The ability to process information in a timely and accurate manner is vital to
the Company's data-intensive insurance and consumer finance businesses. The
Company has recognized for a number of years that the computer systems used by
these businesses must be Year 2000 compliant by December 31, 1999 and, in some
instances, well in advance of that date. To meet this challenge, the Company and
its subsidiaries have instituted a four-phase Year 2000 program:
1) Assessment -- Identifying all hardware, software and key service
providers posing a Year 2000 exposure and the prioritizing of related Year
2000 projects;
2) Remediation and Conversion -- Procuring replacement Year 2000 compliant
hardware or software (including improvements in functionality in addition
to being Year 2000 compliant) or modifying existing software to be Year
2000 compliant;
3) Validation -- Testing and certification, including review of documented
remediation work and test results by technical project teams and key users,
of all such critical hardware and software;
4) Production -- Installing and placing into production all such critical
new or remediated hardware and software.
Each of the Company's business segments is responsible for developing and
implementing detailed project plans to address its Year 2000 exposure. Each
business segment's progress is monitored and reviewed by the Company's Year 2000
Certification Team. The Company's Year 2000 Certification Team is comprised of
senior members of the Company Information Systems Audit Group and Data Systems
Group and reports to the Company's senior management and Board of Directors on a
regular basis. In addition, the Company's insurance subsidiaries are subject to
oversight by state insurance regulatory bodies and its consumer finance
subsidiary is subject to oversight by the FDIC.
Each of the Company's three business segments has substantially completed all
four phases for both its mission critical projects and non-mission critical
projects. For purposes of this Year 2000 discussion, the term "mission critical"
refers to key business functions, such as the processing of business
transactions, regulatory compliance and archival of important records, upon
which the Company is materially dependent.
The Property and Casualty Insurance segment is comprised primarily of several
separate business units operating in different geographical regions. Each
business unit has its unique set of mission critical applications that it uses
to process transactions. Should a business unit experience a Year 2000 failure,
the Company's contingency plan is to transfer the processing of that business
unit's transactions to another of the Property and Casualty Insurance segment's
business units and process transactions manually until the transfer is complete.
11
Year 2000 - continued
The Life and Health Insurance segment is comprised primarily of three separate
business units operating in different geographical regions and offering similar
insurance policies using employee-agents. Each business unit has its unique set
of mission critical applications that it uses to process transactions. Should
one or two of these business units experience a Year 2000 failure, the Company's
contingency plan is to transfer the processing of that business unit's
transactions to another of the Life and Health Insurance segment's business
units and process transactions manually until the transfer is complete.
The Company's Consumer Finance segment outsources its mission critical data
processing to Fiserv, Inc. ("Fiserv"). As a provider of third party data
processing services to the banking and financial services industry, Fiserv and
the data processing services it provides are subject to limited oversight by the
FDIC. In March of 1999, the Consumer Finance segment migrated from its former
Fiserv system to another system that Fiserv has represented to be Year 2000
compliant. The Consumer Finance segment has reviewed Fiserv's Year 2000 testing
documentation, the reports of an independent auditing concern engaged to review
Fiserv's Year 2000 testing and the reports of certain regulatory agencies,
including the FDIC, covering Fiserv's Year 2000 program. In addition to these
reviews and tests, the Consumer Finance segment has developed a contingency plan
to off-load all customer loan and deposit records prior to January 1, 2000 and
process customer loans and deposits manually at its branch offices in the event
of a Year 2000 failure.
The Company has not identified any Year 2000 problems associated with non-
information technology systems (e.g., telephone systems, elevators, etc.) that
have not either been remediated or replaced, or scheduled to be remediated or
replaced prior to January 1, 2000, or which are likely to pose any material
risks to the Company's operations.
The Company is also reviewing the Year 2000 issue with key service providers,
including banks, brokers and investment custodians, and continually updating its
risk assessment, readiness evaluation, action plans and contingency plans
related to these service providers. In addition, the Company is reviewing the
Year 2000 issue as it relates to its investee companies (Curtiss-Wright, Litton
and UNOVA; the "Investees") as well as its significant investment in Baker
Hughes by reviewing public disclosures concerning Year 2000 readiness made by
such companies. The Company has no representatives on any of the Investees' or
Baker Hughes' boards of directors and does not otherwise participate in the
management of the Investees or Baker Hughes. Accordingly, the Company does not
possess any non-public information concerning, assumes no responsibility for,
and has no contingency plans for, Year 2000 compliance by the Investees or Baker
Hughes.
If one or more of the Company's business segments, key service providers,
investee companies or Baker Hughes fails to make its computer systems Year 2000
compliant by the necessary dates and experiences a Year 2000 failure,
notwithstanding contingency plans currently contemplated, such failure(s) could
materially adversely affect the Company's operations and financial results. Each
of the Company's three business segments depends heavily on its computer systems
to manage its operations. The Company believes that the most reasonably likely
worst case scenario would consist of a combination of Year 2000 failures,
including but not limited to the failures discussed above, in the Company's
mission critical systems, coupled with Year 2000 failures at one or more of the
Investees or Baker Hughes. In such a scenario, the Company might be forced to
rely on the manual processing of transactions, or, if feasible, to shift
processing to other Company systems or third party data processing vendors,
which in either case would likely have a material adverse effect on costs and
produce an increased probability of errors and potential legal exposures
resulting from such errors. Such a scenario could also result in the loss of
revenues, the extent of which is not estimable. In addition, Year 2000 failures
at one or more Investees or Baker Hughes could materially affect their earnings,
and therefore adversely affect the earnings of the Company and the Company's
carrying value of its investment in these companies.
Incremental expense recognized directly related to rewriting and testing
existing applications or converting to new Year 2000 compliant applications
totaled $3.2 million and $8.2 million for the nine months ended September 30,
1999 and 1998, respectively. Total incremental expense recognized since
inception of the Company's Year 2000 program directly related to rewriting and
testing existing applications or converting to new Year 2000 compliant
applications totaled $26.9 million through September 30, 1999. The Company
estimates that the incremental expense necessary to complete its Year 2000
program and directly related to rewriting and testing existing applications or
converting to new Year 2000 compliant applications will be insignificant for the
remainder of 1999. In addition to the above incremental expenses, upon
completion of the Company's Year 2000 program, the Company estimates that it
will have made capital expenditures, which will be expensed over the useful
lives of the assets to which they relate, totaling approximately $16 million to
replace existing hardware or software.
NOTE: The foregoing discussion on Year 2000 issues shall be considered "Year
2000 Readiness Disclosure" for purposes of the Year 2000 Information and
Readiness Disclosure Act.
12
Accounting Changes
Effective January 1, 1999, the Company prospectively adopted SOP No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP No. 98-1 requires the Company to capitalize qualifying
computer software costs incurred during the application development stage.
During the first nine months of 1999, the Company capitalized $7.4 million of
qualifying computer software costs.
In the second quarter of 1999, the Company revised the management reporting of
its segment results to no longer include dividend income received from its
investment in Baker Hughes in the Company's operating segments. The Company
considers the management of its investment in Baker Hughes to be a corporate
responsibility rather than an operating segment responsibility. Prior period
amounts have been reclassified to conform to the revised reporting. This change
had no effect on Net Income.
In June 1999, the Financial Accounting Standards Board issued SFAS No.137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" which deferred the effective date of
SFAS No. 133, "Accounting for Derivatives Instruments and for Hedging
Activities." SFAS No. 133 requires all derivatives to be recorded on the balance
sheet at fair value and establishes "special accounting" for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments; hedges of the variable cash flows of forecasted
transactions; and hedges of foreign currency exposures of net investments in
foreign operations. Accordingly, SFAS No. 133 is effective for years beginning
after June 15, 2000, with earlier adoption permitted. The Company believes that
the effect of adoption of SFAS No. 133 will not be material.
Caution Regarding Forward-Looking Statements
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the accompanying Condensed Consolidated Financial Statements
(including the notes thereto) contain forward-looking statements, which usually
include words such as "believe(s)," "goal(s)," "target(s)," "estimate(s),"
"anticipate(s)" and similar expressions. Readers are cautioned not to place
undue reliance on such statements, which speak only as of the date of this
Quarterly Report. Forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
contemplated in such statements. Such risks and uncertainties include, but are
not limited to, those described under this Item 2 above, changes in economic
factors (such as interest rates), changes in competitive conditions (including
availability of labor with required technical or other skills), the number and
severity of insurance claims (including those associated with catastrophe
losses), governmental actions (including new laws or regulations or court
decisions interpreting existing laws and regulations) and adverse judgments in
litigation to which the Company or its subsidiaries are parties. No assurances
can be given that the results contemplated in any forward-looking statements
will be achieved. The Company assumes no obligation to release publicly any
revisions to any forward-looking statements as a result of events or
developments subsequent to the date of this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 305 of Regulation S-K has been omitted because
the sources and effects of changes in the information provided under Item 305 of
Regulation S-K from the end of the preceding year to the date of this Quarterly
Report on Form 10-Q are not material.
13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Certificate of Incorporation (Incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form 10 dated
February 15, 1990.)
3.2 Amended and Restated By-Laws (Incorporated herein by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.)
4 Rights Agreement between the Company and First Chicago Trust Company
of New York, as rights agent, dated as of August 3, 1994
(Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A dated August 3, 1994.)
10.1 Unitrin, Inc. 1990 Stock Option Plan as amended and restated
(Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
10.2 Unitrin, Inc. 1997 Stock Option Plan as amended and restated
(Incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
10.3 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan as amended
and restated (Incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.)
10.4 Unitrin, Inc. Pension Equalization Plan (Incorporated herein by
reference to Exhibit 10.4 to Company's Annual Report on Form 10-K for
the year ended December 31, 1994.)
10.5 Unitrin is a party to individual severance agreements (the form of
which is incorporated herein by reference to Exhibit 10.5 to the
Company's 1994 Annual Report on Form 10-K), with following executive
officers:
Richard C. Vie (Chairman, President and Chief Executive Officer)
David F. Bengston (Vice President)
James W. Burkett (Senior Vice President)
Eric J. Draut (Senior Vice President, Treasurer & Chief Financial
Officer)
Scott Renwick (General Counsel and Secretary)
Donald G. Southwell (Senior Vice President)
(Note: Each of the foregoing agreements is identical except that the
severance compensation multiple is 2.99 for Mr. Vie and 2.0 for the
other executive officers. The term of these agreements has been
extended by action of Unitrin's board of directors through January 1,
2001.)
10.6 Severance Compensation Plan After Change of Control (Incorporated
herein by reference to Exhibit 10.6 to the Company's 1994 Annual
Report on Form 10-K; the term of this plan has been extended by
Unitrin's board of directors through January 1, 2001.)
10.7 1998 Bonus Plan for Senior Executives (Incorporated herein by
reference to Exhibit A of the Company's Proxy Statement, dated April
9, 1998, in connection with Company's annual meeting of
shareholders.)
10.8 Amended and Restated Credit Agreement, dated September 17, 1997 among
Unitrin, Inc., the Lenders party thereto, and NationsBank of Texas,
N.A. as Administrative Agent (Incorporated herein by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.)
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1999.
14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Unitrin, Inc.
Date: November 3, 1999 /s/ Richard C. Vie
-----------------------------
Richard C. Vie
Chairman, President
and Chief Executive Officer
Date: November 3, 1999 /s/ Richard Roeske
-----------------------------
Richard Roeske
Corporate Controller
(Principal Accounting Officer)
15